Tax Court Denies Madoff Victims $8.2 Million Deduction
From the desk of Jim Eccleston at Eccleston Law
Victims of Bernie Madoff's Ponzi scheme, Christopher and Silvana Pascucci, cannot claim an $8.2 million tax deduction for their investment in life insurance premiums.
As reported by BloombergTax, when the couple filed their petition, the Pascuccis, who were New York residents, invested their life insurance premiums into Tremont Opportunity Fund III LP, a feeder fund controlled by MetLife. The fund subsequently invested in the Rye Broad Market Series, which was heavily involved with Madoff's Bernard L. Madoff Investment Securities. Due to this indirect investment, Judge David Gustafson ruled that the Pascuccis did not have direct ownership of the assets and thus are ineligible for the theft loss deduction.
Judge Gustafson explained that Mr. Pascucci did not own the assets in the separate accounts managed by the entities controlling the funds. Instead, he owned the policies issued by those companies. Under Section 165, an individual can claim a deduction for a loss sustained during the taxable year if they can prove a theft occurred, there is no reasonable chance of recovery, and they owned the property when the theft happened.
The IRS issued the Pascuccis a notice of deficiency in 2018, prompting them to petition the Tax Court in 2019. Although the IRS conceded the losses related to the family partnership in 2022, it argued that the couple failed to prove ownership of the insurance policies necessary to claim losses on them.
The court agreed with the IRS, stating that the losses from the private-placement variable life insurance policies do not qualify for the tax deduction due to the degree of removal from the direct investment.
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